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News Article

DoD's Privatized Housing Program Hits High Gear

By Jim GaramoneAmerican Forces Press Service

WASHINGTON, Feb. 16, 1999  After a slow start, the DoD family housing privatization program is finding its legs and service members should see a rapid improvement in base housing throughout the United States. In fact, some 60,000 military housing units should be privatized by the end of fiscal 2000.

The program, started in fiscal 1996, is designed to speed up refurbishing current quarters and build new housing, said DoD program coordinator Joe Sikes. DoD estimates it would need 30 years under the old military construction system to deal with the 180,000 substandard housing units it has today. Under the privatization program, officials believe they can work off the backlog in 10 years.

About 1,000 quarters have been privatized so far -- 404 in a Navy program at Corpus Christi, Texas; 185 at Naval Station Everett, Wash.; and 420 at Lackland Air Force Base, Texas.

DoD issued requests for proposals or qualifications for 4,609 more units. Congress approved the projects, and construction will probably start this fiscal year. They are at Fort Carson, Colo.; Marine Corps Logistics Base, Albany, Ga.; Camp Pendleton, Calif.; Robins AFB, Ga.; Naval Air Station Kingsville, Texas; and another project in Everett.

DoD has notified Congress it would like to issue requests for a further privatization of 21,311 housing units. It is drafting solicitations for another 10,662 units and will deliver this request to Congress this year. In addition, 26 other projects covering 50,000 units are currently under consideration. Not all will be privatized, officials said, but they will be examined.

Under the basic program, private companies build or refurbish and then manage family housing units. DoD puts in a certain amount of money, and contractors then approach financial institutions to borrow against the project. For every dollar DoD invests, under this program, the private sector will sink in four or five.

"We can turn over our housing units to the private sector, who can go get private-sector financing," said Sikes. "The private sector can then fix up the houses or build new houses and, in exchange, get rent from the service members who live in the houses. Instead of paying all this [military construction] money and all the operations and maintenance money, we pay the allowances to the service members, and the private sector [has the incentive] to build nice enough housing to attract service members."

Service members' housing allowances are divided into shares for rent and utilities. The Army and Air Force compute privatized housing rents by estimating the monthly cost of utilities and subtracting 110 percent of it from the member's housing allowance. For example, if the utilities estimate is $100 and the member's housing allowance is $500, the services would allot $110 for utilities and $390 for rent.

Service members pay their housing allowances to the contractor, who can use only the rent share to turn his profit. Using the example above, a family with a $70 utility bill in a month is due a $40 refund from the contractor. Similarly, if the utility bill is $125, the family owes the $15 difference. The private company will analyze local utility costs annually.

The Navy is still wrestling with how it will structure its program. In the two Navy projects already completed, there are some out-of-pocket expenses for utilities, but this may change, defense officials said.

There are two types of privatization -- on-base and off-base. Contracts for on-base programs are let for 50 years. "This is an Office of Management and Budget requirement," Sikes said. DoD may give the land or housing to private companies or lease it to them.

Off-base housing is where the private company buys its own land in the civilian community and builds the houses. These contracts can be for any length of time. "The first two Navy projects were 10-year deals," Sikes said. "[The private companies] agreed to provide the housing for 10 years and we are a one-third partner. At the end of that time we split up the proceeds and do the whole thing over again."

Defense business isn't as secure as it once was because of base closures, downsizing and other changes. DoD offers some security to wary private companies concerned about incurring losses to such unforeseeable circumstances, Sikes said.

The program started slowly, he said, because DoD had to develop expertise in real estate finance and real estate development. The department hired consultants to help structure the real estate deals and evaluate the proposals.

"We spent about $7.5 million on consultants in the first two years, trying to develop these deals in over 40 places," Sikes said. He said the experts helped DoD save $11 million at Lackland AFB alone. "We originally expected [the Lackland project] to cost us $17 million. It ended up costing us $6 million."

Officials said they expect more savings as the program goes along. Fort Carson's 2,663-unit project was expected to cost the government $15 million. "Even in the preliminary estimates that was brought down to $10 million," Sikes said.

He said the whole program "is a major cultural change" for DoD. There were two reasons this was a hard sell within the department. "First is that you have this private sector housing on base -- something that we haven't had in the past. Second, the service members themselves don't just move into housing and then have no responsibility to pay anything. They are actually going to get the allowances and then they have to turn them over to the developer."

Sikes said this creates a host of administrative problems, one of which is how are companies paid. He said the services are leaning toward making payments through the allotment system.

Making sure service members understand the benefits of this program is also crucial. "We've got to make sure service members understand that they are getting better housing through this," he said. "It's not something that is an extra requirement on them.